For example if 1 2 3 4 5 6 a 1 2 3 and b

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Unformatted text preview: del with u = 3/2, d = 2/3, interest rate r = 1/6. and suppose S0 = 45. What is the value of the European call option with strike price 50, i.e., the option with payo↵ (50 S2 )+ . Find the stock holdings 0 , 1 (H ) and 1 (T ) need to replicate the option exactly. 6.8. The payo↵ of the Asian option is based on the average price: An = (S0 + · · · + Sn )/(n + 1). Suppose that the stock follows the binomial model with S0 = 4, u = 2, d = 1/2, and r = 1/4. (a) Compute the value function Vn (a) and the replicating portfolio n (a) for the three period call option with strike 4. (b) Check your answer for V0 by using V0 = E ⇤ (V3 /(1 + r)3 ). 6.9. In the putback option at time 3 you can buy the stock for the lowest price seen in the past and the sell it at its current price for a profit of V 3 = S3 min Sm 0m3 Suppose that the stock follows the binomial model with S0 = 4, u = 2, d = 1/2, and r = 1/4. (a) Compute the value function Vn (a) and the replicating portfolio n (a) for the three period call option with strike 4. (b) Check your an...
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This document was uploaded on 03/06/2014 for the course MATH 4740 at Cornell University (Engineering School).

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